The Taxman Cometh For Big Data-Driven Companies

Data-driven commerce is an economic good, not a bad, so we shouldn't consider taxing it like carbon emissions.

Amid soaring national deficits and debt, the powers that be complain that certain companies aren't paying their "fair share" of taxes. A new report commissioned by the French government but gaining some attention in the U.S. and elsewhere recommends changing national and international tax rules to extract more money from Internet companies in particular in order to prop up government spending.

The notion is that Internet titans such as Google and Amazon pay only a fraction of the taxes they ought to pay because the nature of their digital businesses lets them locate much of their profit-making operations in low-tax countries. The proposed solution: Tax those companies' "intensive use of data" in the country where that data is collected, Nicolas Colin, one of the authors of the controversial report, writes on Forbes.com.

The reasoning goes something like this: Internet companies collect all kinds of user data to deliver targeted advertising, customize products, make recommendations, adjust prices and drive any number of other profit-making endeavors. Those users, in effect, "become part of business operations," Colin writes, in some cases replacing employees and contractors. And because those users aren't paid like employees, their "free work" lets tech companies "reach the highest economies of scale and massive profitability," he says. Yet the taxman can't have at the full extent of those high profits when they're on the books in other countries.

"In every sector, innovative tech companies make their way into the value chain, focus on the most strategic point (usually client or user relationship), collect data, and leverage it to siphon off the profit margins from entire industries," Colin writes. "The Internet of things only accelerates this process, as it enables tech companies to grow beyond pure-playing business models and enter new markets, like payment, cars or energy.

"As the digital economy keeps growing, every sector's margin will be relocated abroad, disappearing from our GDP and depriving the government from additional revenue that should normally ensue from higher productivity."

The report's broad goal is to recommend a way for developed countries to "recover the power to tax profits made by giant tech companies" based in those countries. So who exactly are these "giant tech companies" to be subjected to this new form of data-based taxation? We hear about Google and Amazon, and it's easy enough to extrapolate the thinking to the likes of eBay and Facebook. But is Wal-Mart a giant tech company? Is Procter & Gamble? Are General Motors and Ford? Because each of them (and thousands more) is collecting many terabytes of customer and other data to fuel their businesses.

Another obvious question: What will be the process for determining the amount of taxable data? It's an idea that reeks of imprecision.

Colin acknowledges that because "the value of data is not yet mastered, the goal should not be to tax data collection per se. Instead it should be to create an incentive for businesses that rely on regular and systematic monitoring to adopt compliant practices in favor of user empowerment and innovation." Huh? Is the proposal to tax data collection or not?

Stating that "no country can reach this goal alone," Colin urges both the European Union and global Organization for Economic Cooperation and Development to begin negotiating new tax rules and treaties. "A new definition of a permanent establishment, specifically introduced for the data-driven economy, should be based on the notion of users as co-creators of value," he writes.

Colin goes on to say that overhauling tax policy based on data collection is part of what it will take to complete the process of "creative destruction," first described by Austrian-American economist Joseph Schumpeter in the 1940s. But his analysis has the creative destruction principle exactly backward. What Schumpeter had in mind was to allow the demise of has-been companies and industries to make way for new, more creative and innovative ones, not to hamstring the most creative and innovative ones with clever new tax techniques.

A fundamental assumption of the report is that governments deprived of fat tax revenues from new economy companies are themselves fiscally responsible. They're not. In the U.S. and elsewhere, no matter the party in power, governments have shown little interest in balancing their budgets. They need to spend the money they now collect more wisely, not turn to pie-in-the-sky Internet taxation schemes.

But I digress. Even if you think governments need more revenue, this is a loony way to get it. The report's authors go so far as to compare their tax scheme to the one proposed in the Kyoto Protocol, whereby countries levy a tax on a company's carbon emissions -- as if leveraging data for competitive advantage is somehow congruous with polluting the environment. Data-driven commerce is an economic good, not a bad, even if companies misuse that data from time to time.

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A way to raise more revenue not mentioned is to eliminate the exemption granted to online-only stores to avoid having to collect and remit sales tax on purchases to state governments. The online merchant model is sufficiently established and successful it no longer needs or warrants this subsidy. Brick-and-mortar stores such as Walmart, Target, and Best Buy are clamping down where possible on the practice of "showrooming". The practice and freedom from sales tax collection sounded the death knell for most retail camera stores years ago.

You speak of taxing physical transactions but the article title is "big data". The US Federal Government taxes earnings however States like NY and NJ tax property valuation, Federal Courts have resolved that Data is owned by where it resides, e.g. where your service provider data center is located, and that "Data" can be assessed as property. (Also, protection from "Search and Seizure" does not apply if your data is not at your company owned facility.) (In Office365, MS keeps duplicates in Washington State and Virginia so your Data could be taxed twice; WA has the onerous B&O taxation.)

Regardless if a Democrat, Republican, or other party affiliation is driving the old, smoggy, 1 mpg truck that is our government today - we should insist they improve the efficiency of their operations before we pay for one more drop of gasoline.

Ah, everybody is for government spending except when the taxman comes for them and sticks his hand inside their pockets. How ironic. Besides, last time I looked Amazon wasn't all that profitable. And with Google being big supporters of liberal Obama, would he bite the hand that feeds him?

Besides, taxing carbon emissions is stupid and self-defeating as long as nations such as India and China continue to add coal fired electricity plants at the rate of one per day. And the idea that something as complex as the Earth's climate is controlled by only one variable (the percentage of the atmospheric trace gas carbon dioxide) is ludicrous no matter how many government grant grubbing scientists parrot that notion.

It is all about increasing taxes and not about saving the environment, the earth, or making life better for mankind. Using the billions wasted on a foolish carbon emission trading scheme instead for simple things such as providing mosquito nets and vacinations for children in Africa would do more good.

It's worth noting here that in other tech tax news, states are beginning to say that cloud computing services should be subject to sales taxes on the theory that software is taxable however delivered and sold. I wonder if the tax code has forever had trouble keeping up with the pace of innovation and adjusting to new technologies.

We should be taxing the data sellers, active campaign for me for over a year as companies make billions in profit and nobody sees it. Model it just like a sales tax requiring a license and a federal site to where those who are licensed disclosed what kind of data they sell and to who. We need this as consumers are getting ripped in not knowing. I wrote a series of posts called The Attack of the Killer Algorithms with every day examples on how the data is increasingly becoming flawed as companies write code and relate data to make a buck at times when there's really no relationship with the data tables, but market it again to make a buck and consumers are hurt. FICO is huge example with their nonsense medication compliance analytics which is all bogus.

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